Dirty deeds that are deaf, dumb and blind 3Dec14

Dirty deeds that are deaf, dumb and blind

Michael O’Neill

FX Consultant / IFXA Ltd



  • US dollar shrugs off data and awaits ECB
  • BoC statement provides fodder for bulls and bears
  • FX market seemingly indifferent to risks of EURUSD bounce

By Michael O’Neill

The US dollar continued to grind higher in an active Wednesday session with USDJPY punching to seven-year highs and soft Australian GDP data driving AUDUSD down under, down under. The ADP employment report showed a gain of 208,000 jobs rather than the 221,000 forecast but traders didn’t want to know and ignored the data.

BoC finds clouds in silver linings

The Bank of Canada, as expected, left interest rates unchanged and delivered a statement with enough meat for bulls and bears alike.

The USDCAD bulls will take solace from the statement’s dismissal of the rise in inflation over the past year. The bank continues to believe the gains are due to temporary effects. The bulls will also like the concern that the “lower profile for oil and certain other commodity prices will weigh on the Canadian economy”. The bank also noted that the “labour market continues to indicate significant slack in the economy”.

Canada is giving the impression of a degree of recovery in the economy. Photo: iStock

The USD bears like the comment that Canada’s economy is showing signs of a broadening recovery and the acknowledgement that the output gap is shrinking.

The initial reaction to the statement was to buy USDCAD but the USDCAD bears have won out in the short term, in part due to the fact that traders went into the meeting long dollars.

USDCAD technical outlook

The intraday technicals are mixed. The short-term downtrend from the November 30 peak is conflicting with a short-term uptrend from the Nov. 24 low, confining (for now) USDCAD in a 1.1350-1.1400 range. A break of 1.1350 risks 1.1310 while a recovery above 1.1400 suggests a return to 1.1460.

Chart: USDCAD Hourly

Source: Saxo Bank

Dirty (oil) deeds done dirt cheap

“If you’re having trouble with an oil glut,

Price drop giving you the blues,

you want Brent back at 90 bucks, here’s what you gotta do,

pick up the phone, I’m always home

call me anytime, 36, 24,36,0, I lead a life of crime,

Dirty oil deeds done dirt cheap” (With apologies to AC/DC)

Oil prices are sloshing about like a Sumo wrestler in a wading pool leaving traders scratching their heads trying to determine if the WTI plunge from Thursday found a short-term bottom at $63.80 or if the bounce was of the deceased feline variety. My bet is that the cat won’t be purring any time soon.

Monday’s rally stalled right around the 38.2% Fibonacci retracement level of the November 21-December 1 range and has retreated steadily since then. Today’s minor uptick has also stalled at the top of the intraday downtrend line. The post-Opec meeting oil price collapse was due to the belief that the current oil glut wouldn’t disappear very soon, with many economists and strategists warning of the prospect of sub-$60.00/bbl.

On Monday, WTI bounced from a five-year low but could not move above the 38.2% Fibonacci retracement level of the Nov.21-Dec.1 range. Not surprisingly, the intraday downtrend remains intact. The focus shifted back to over-supply on Tuesday with news that the Iraqis and Kurds agreed to an export deal which would add another 300,000 bb/d to the market. It will take more than a weekend for over-supply issues to dissipate, which will keep both WTI and the Canadian dollar under pressure or at least, limit gains.

Chart: US oil continuous hourly

Source: Saxo Bank

Hawk, hawk, hawking on the rate hike door

Bob Dylan and Guns N’Roses sang about knocking on heaven’s door back in the day while so far this week, messeiurs Dudley and Fisher are singing about knocking on the rate hike’s door. Fisher warned that interest rates would go up if the Fed saw that the unemployment continued to decline, the labour market strengthened and if they saw some signs of inflation beginning to increase. He also said that the Federal Reserve Open Market Committee (FOMC was getting closer to deleting the “considerable time” phrase. Earlier, New York Fed President William Dudley said that the central bank would unleash more aggressive rate rises if financial markets do not tighten as expected.

Despite none of the statements being actual “news”, they were reportedly part of the reason for the Tuesday US dollar rally.

EURUSD — The deaf, dumb, blind trade

EURUSD is the “Tommy” (i.e. that deaf, dumb and blind kid created by The Who) of the FX world. It has made fresh 2014 lows today as it appears that the whole world has bought into the “higher US /lower Eurozone interest rate story, sooner rather than later. There are numerous explanations as to why the short EURUSD positioning isn’t as stretched as it appears but the fact remains — the FX market is well-short and seemingly indifferent to the risks of a EURUSD bounce. The prevailing sentiment is that EURUSD is a sell — on rallies that should limit upside and by default, losses.

However, Germany and the ECB are reportedly at odds over the impact of falling oil prices on the Eurozone economy. Germany’s Jens Weidmann sees lower prices as a mini-stimulus package, according to a news story, while the ECB is concerned about the deflationary impact. In addition, ECB vice-president Constancio suggested that the best time to judge the effects of current stimulus actions is in the first quarter.

The announcement of additional stimulus actions by the ECB tomorrow is far from a “done deal”. If the ECB disappoints, the proverbial “sellers-at better-level” traders may become unhappy at getting short near year-end with FX liquidity getting thinner and thinner, by the day. That is a recipe for a nasty spike higher.

Chart: EURUSD 4-hour

Source: Saxo Bank

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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